Stocks surge to best post-midterm rally in more than 30 years

Stocks soared as the results of the US midterm elections panned out as anticipated, with Democrats winning back control of the House of Representatives and Republicans retaining the Senate.

The S&P 500 (^GSPC) rose 2.11%, or 58.23 points as of market close. The Dow (^DJI) climbed 2.12%, or 542.67 points, and rallied Wednesday afternoon after President Donald Trump signaled in a press conference he would be willing to work with Democrats on plans for infrastructure, health-care and trade. The Nasdaq (^IXIC) rose 2.64%, or 194.79 points.

The surge in equities marks the best post-midterm election rally for the S&P 500 and Dow in more than three decades.

“In a dispassionate way the equity markets probably got the outcome they wanted. The concern that an emboldened Republican Party retaining both houses might have embraced another round of tax cuts, thereby increasing the deficit, has receded,” Jefferies analyst Sean Darby wrote in a note. “Meanwhile, the worry was that if the Democrats had won back both houses, the tax cuts and regulatory changes might have been rolled back or rescinded.”

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., November 5, 2018. REUTERS/Brendan McDermid

As midterm results are just solidifying, it’s too soon to tell exactly how future policy will pan out, said Torsten Slok, Deutsche Bank chief international economist. But certain areas will carry especially major implications for markets as legislative direction begins to unfold. “What matters for markets is what will happen to trade policy, health care policy, immigration policy, and fiscal policy,” Slok said.

With the House changing hands, Congress is set for at least two years of gridlock. This means some of the fiscal policy measures expected to sail through a GOP-controlled Congress become less of a certainty.

The stock market has generally seen positive returns in the 12 months following midterm elections regardless of outcome, said John Lynch, LPL Financial’s chief investment strategist. “When it comes to stock market performance, we would argue that election outcomes are not particularly important,” he wrote in a note.

Andrew Hunter of Capital Economics agreed that the midterms are unlikely to have a significant impact on the economy. However, “they probably raise the risk that political uncertainty once again becomes the dominant theme over the next couple of years,” he said.

STOCKS: Industrial, tech stocks rise

Shares of industrial stocks including 3M (MMM) and Caterpillar (CAT) rose as some investors viewed the split Congress as a potential mitigator to Trump’s aggressive trade policies.

3M’s stock rose 3% to $201.13 per share at market close, while Caterpillar’s stock increased more than 4% to $135.09 each.

However, Hunter said “hopes that this will mark the end of Trump’s protectionist agenda are likely to be disappointed” since the president’s executive powers offer more leeway on trade policy. Goldman Sachs analyst Jan Hatzius echoed this view and said additional tariffs in 2019 remain more likely than not.

Shares of big tech companies also climbed Wednesdayasthe specter of regulatory crackdowns against giants including Amazon (AMZN) fizzled with a divided Congress. In the new House, “There don’t seem to be any anti-tech firebrands in the new leadership, which is good news for the industry,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note. “If gridlock in Washington is good for stocks, it may be absolutely wonderful for Tech.”

Amazon’s stock rose 6.86% to $1,755.49 per share as of market close. Shares of Google-parent company Alphabet (GOOGL) ticked up 3.62% to $1,108.24 each.

Shares of cannabis stocks rose after several states passed pro-cannabis legislation in the midterm elections. Michigan legalized the recreational use of marijuana, and Utah and Missouri voted to legalize medical use. Shares of Canadian cannabis company Tilray (TLRY) shot up 30.64% to $139.6 each, while Aurora Cannabis’s (ACB) stock advanced 8.78% to $8.05 per share. Canopy Growth Corporation’s (CGC) stock rose 8.24% to $46.10 per share. Cannabis stocks jumped Wednesday afternoon after the resignation of Attorney General Jeff Sessions, a longtime cannabis critic.